Dividend Calendars

[terryelrod 0]

I was just looking at the optionistics website and came across this article: http://www.optionistics.com/s/stock_dividends.  It discusses trading calendar spreads based on the concept that stock price, and therefore option price, is discounted after ex-dividend date.  So the short leg of the calendar would be an option that expires before the ex-dividend date, since it's price would not be discounted.  The long leg of the calendar would be an option with an expiration subsequent to the ex-dividend date, with a discounted price.

 

With my limited knowledge, this strategy seemed logical.  Just wondered if anyone here had investigated this strategy.

[Marco 221]

Never traded this, but don't quite understand the point the author is trying to make. Is he saying your risk is limited as the premium of the calendar is much lower than it usually would be? The problem is that with a dividend large enough the calendar can become negative premium (unlike calendars without a dividend between the expires) that would be the case if the stock goes up and the maturity with the div included becomes an early exercise candidate and will trade very close to intrinsic with the short dated option still having (more) time value. So despite a premium near zero I don't think the risk isn't any lower than with a normal calendar.

[terryelrod 0]

I didn't understand the author to be addressing risk as much as just having an edge because the long calendar leg would have a lower price than normal relative to the short leg. Kinda like having a volatility skew working in your favor.

[Marco 221]

sticking this into an option price I could actually not construct an example where the premium of the calendar went significantly negative. Usually by the time the longer dated call get to 1 delta and become an early exercise the short dated call will have arrived at 1 delta as well and the spread is at zero unless you stick a much higher vol on the shorted leg.

So realistically the downside of that sort of calendar is still (near) zero. So I suppose you can get into a calendar at a low premium with downside to zero and upside is collecting the same $ amount of theta so your % return on premium is much better than on a calendar without dividend. I think the dividend needs to be significant for that effect to be meaningful. With mos dividends in the US paid quarterly (so even a 10% div yield will be split into four 2.5% payments) I'm not sure whether you'll find a practical example. Might work actually on a European name (or its ADR) that pays div only once a year.

See if you can find a real life example and I will try and price it up.

[terryelrod 0]

Thanks for your time Marco.  I went to finviz.com and entered a screen to look for stocks with dividends this month that were greater than 10% with a price of at least $20 (a price of over $50 gave me only one stock).  I went through the list of 11 possibles to be sure they had options with enough open interest to work with.  The following are possibilities:

 

AGNC, dividend = 11.8%

BPT, dividend = 12.43%

NTI, dividend = 19.61%

SDRL, dividend = 10.14%

[Marco 221]

okay looking at AGNC for example:

they should pay a 0.65 USD div on the 20th of Mar (they have cut their div numerous times so the market might price in less than 0.65 USD) Anyway the 14th Mar/20th Jun 22 Call calendar with the dividend is priced at about 0.32 with the stock at  22.04 (mid prices) using the same implied vols and taking dividend to zero that same calendar would be priced at about 0.63.

Now say the stock stays at 22.04 until 10th of mar you should collect about 0.16 USD on theta. So that would be a  50% return on a 0.32 USD premium and would be only about half that (25%) on a 0.63 USD premium. (before commissions) 

 

Which I think is what the article is about. You get a calendar at a discounted premium so your % returns will be higher ($ returns per lot are the same) compared to the same calendar in a period where there is no dividend between the two expiries. 

 

I would caution against screening for dividends as the only criteria though. The main factor for whether or not you calendar will make money will remain whether or not the stock moves away from your strike but if you found some range bound names where you think a calendar makes sense the dividend play seems a good way to boost you % returns / reduce your capital outlay/risk / or leverage - depending on how you see it.

[terryelrod 0]

That's interesting Marco.  Thanks for your time and effort.  There are not a lot of stocks that report dividends greater than 10% so this may not be a big opportunity, but a possibility.

 

Thanks again.

[Marco 221]

yes as I mentioned I'd still screen for calendar candidates by looking for range bound names with IV at low levels compared to history and then add that as additional criteria. Say if you like IBM with that criteria you maybe pick expiries in a fashion that you get a dividend in-between there if possible. As div yield is only about 2% for big blue the effect will be much lower of course

[Kim 7,512]

okay looking at AGNC for example:

they should pay a 0.65 USD div on the 20th of Mar (they have cut their div numerous times so the market might price in less than 0.65 USD) Anyway the 14th Mar/20th Jun 22 Call calendar with the dividend is priced at about 0.32 with the stock at  22.04 (mid prices) using the same implied vols and taking dividend to zero that same calendar would be priced at about 0.63.

Now say the stock stays at 22.04 until 10th of mar you should collect about 0.16 USD on theta. So that would be a  50% return on a 0.32 USD premium and would be only about half that (25%) on a 0.63 USD premium. (before commissions) 

 

Which I think is what the article is about. You get a calendar at a discounted premium so your % returns will be higher ($ returns per lot are the same) compared to the same calendar in a period where there is no dividend between the two expiries. 

 

I would caution against screening for dividends as the only criteria though. The main factor for whether or not you calendar will make money will remain whether or not the stock moves away from your strike but if you found some range bound names where you think a calendar makes sense the dividend play seems a good way to boost you % returns / reduce your capital outlay/risk / or leverage - depending on how you see it.

I just plugged the numbers into ONE software and I must say the results are surprising. Usually the calendars structured with puts and calls (for the same strike) give similar PnL chart, but in this case, the call calendar gives profit potential of 135% while the put calendar gives profit potential of 60%.

 

Might be worth exploring further. 

[mcmatterson 3]

I just plugged the numbers into ONE software and I must say the results are surprising. Usually the calendars structured with puts and calls (for the same strike) give similar PnL chart, but in this case, the call calendar gives profit potential of 135% while the put calendar gives profit potential of 60%.

 

Might be worth exploring further. 

 

I think this one might work. The IBM monthly calendar (short April, long May) is at $0.85 for the calls and $1.45 for the puts.  Preliminary earnings release date is April 16 according to the IBM website, so if that happens to move later you could get a nice bonus.

 

Do you think we could profit from this one? 

[bike.eagle 1]

Any new thoughts on this strategy?